Prudent economic policy management and a strong policy framework have supported Colombia’s remarkable economic performance in recent years and its resilience to adverse shocks, said the IMF in its regular assessment of Latin America’s fourth largest economy.

“Overall, the economic outlook is promising and the authorities are actively addressing Colombia’s challenges to preserve sustainable and inclusive growth,” said the IMF’s mission chief for Colombia, Valerie Cerra.

Growth easing but resilient

Colombia’s growth moderated to below its estimated potential rate of 4½ percent in 2012, from nearly 6 percent the year before, the IMF said.

The slowdown accelerated in the second half of 2012, partly due to supply shocks and weaker external conditions. The IMF said the central bank reacted appropriately by cutting interest rates by 100 basis points.

“Despite the slowdown, economic performance has remained strong,” added Cerra. Inflation fell to 2.4 percent at the end of the 2012, the unemployment rate declined to 9.2 percent in November (from rates above 16 percent a decade ago), and debt ratios remain low.

Colombia has been reaping the benefits of high commodity prices, strong macroeconomic credibility, and an improved security situation. Large inflows of foreign direct investment, especially to the hydrocarbon sector, have supported the external position and have been the principal source of recent exchange rate appreciation.

Favorable outlook, global risks

The outlook for 2013 is favorable. The country’s economy is expected to grow broadly in line with potential growth and inflation is expected to remain low. Fiscal policy will be guided by the medium-term consolidation plans to lower the central government structural deficit to 1 percent of GDP by 2022.

While spillovers from the global turmoil have been limited so far, Colombia is vulnerable to a sharp worsening in the external environment.

The report noted that there is ample space to adjust policies if downside risks materialize. Monetary policy has room for further easing and the flexible exchange rate should continue to serve as a shock absorber.

“Nimble policies and a comfortable level of international reserves, reinforced by the IMF’s Flexible Credit Line (FCL) arrangement, provide the country with buffers against such shocks,” pointed out Cerra.

The FCL, created in 2009, provides an insurance against risks for the IMF’s strongest performing members with a solid policy track record.

Ensuring inclusive growth

The IMF cautioned that the Colombian economy and public finances are becoming increasingly dependent on the volatile oil and mining sectors, and unemployment, income inequality, and labor informality remain high.

The authorities are taking steps to overcome these challenges, the report said. In December 2012, Congress approved a comprehensive tax reform, which will reduce nonwage labor costs and inequality, facilitate tax administration and compliance, and promote job creation in the formal sector. The government also intends to reform the public pension system to improve coverage and fairness.

The IMF also urged the authorities to consider a more ambitious fiscal consolidation plan, focused on increasing noncommodity revenues, which could help mitigate the appreciation pressures, build buffers against adverse commodity price shocks, and create fiscal space for improving public infrastructure.

Financial sector sound

As discussed in a companion report, the Financial System Stability Assessment, the health of the financial system remains sound. Banks appear resilient to a wide range of shocks, although they remain vulnerable to concentration risk.

Financial supervision is effective, but the IMF said it could be further strengthened through efforts to improve the risk-based approach to supervision, promote the de jure independence and legal protection of supervisors, strengthen the financial safety net, and extend supervisory and regulatory powers to holding companies of financial institutions.

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